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AVOID Aussie Banks: Warren Buffett inspired fund manager tells why

Warren Buffett has been and remains an inspiration for Australian fund manager Wayne Peters who manages the unlisted Peters MacGregor Global Fund (PMGF). Having made the pilgrimage to the Berkshire Hathaway Inc. (NYSE: BRK A) annual meeting in Omaha 17 times, Peters holds a similar philosophy.

As the fund has outperformed globally-invested competitors in the listed space including Magellan Financial Group Ltd (ASX: MFG), it’s worth tapping into his thoughts.

The problems with Australian banks:

As the PMGF invests solely in overseas stocks it is good to have a global perspective on banks. At first glance, Australian banks including Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd. (ASX: NAB), and Australia and New Zealand Banking Group (ASX: ANZ) appear rock solid.

However, Wayne Peters makes the comparison between banks in Australia and the U.S., in terms of relative exposures to the respective housing markets. In Australia, it takes 6.5 to 7 times average median after-tax household income to purchase a house. In America, the ratio is 2.8 to 3. This suggests that even a 10% retracement in Australian house prices would have a material effect upon bad debts.

Additionally, Australian banks are heavily reliant on the goodwill of the offshore bond markets to fund housing loans. Only 65% of home lending is sourced from funds on deposit, whereas the figure is around 90% for U.S. banks like Wells Fargo & Co (NYSE: WFC), one of the maximum of 25 stocks currently held by  PMGF. We all recall that during the GFC, access to funding from bond markets around the world was nigh on impossible.

Why invest overseas?

In a recent article entitled My 10 biggest investing mistakes, Motley Fool analyst Mike King regretted not having invested in U.S. stocks at an earlier stage.

Similarly it is instructive to obtain Wayne Peter’s view on local versus international shares. Many Australian investors are vastly underweight overseas exposure. Wayne makes the point that our exposure to the Australian economy is more pronounced by dint of having a local job, owning a house and investing in Australian shares.

What Now:

In my opinion, it is time to be wary of Australian banks not only for the reasons cited above, but also on valuation grounds and the potential loss of market share to mortgage brokers and other market entrants into former banking domains such as foreign exchange. Funds raised from selling bank shares may be directed toward overseas or other Australian equity holdings. So just like Wayne Peters, NOW is the time to pay attention to the investing themes of Warren Buffet via the following FREE report…. 

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Motley Fool contributor Mark Woodruff does not own shares in any of the companies mentioned in this article.

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